Claims Dismissed Against Successor Transfer Agent Where There Was No Showing Of A Duty Owed To The Investors

In Magna Equities II, LLC et al., v. Writ Media Group Inc., et al., No. 653808/2016, 2017 BL 115243 (N.Y. Sup. Ct March 30, 2017), Justice Peter Sherwood dismissed for lack of jurisdiction and failure to state a claim all claims brought by a group of investors against defendant Pacific Stock Transfer (“PST”). The case serves as a reminder that plaintiffs must plead sufficient allegations in order to persuade the Commercial Division to exercise its jurisdiction over a non-domiciliary, non-signatory of the agreement at issue.

Background

The case arose from a July 2014 agreement between plaintiffs and Writ Media (“Writ”) in which plaintiffs, as investors in Writ, extended loans to Writ pursuant to convertible promissory notes – a common start-up financing technique. These notes entitled the investors to convert their debt to common stock of Writ upon a notice of conversion. According to the agreement, signed by both Writ and its then-transfer agent, Signature Stock Transfer, Inc., plaintiffs could submit a conversion request to Signature, which was to honor the request without need for any written confirmation from Writ. However, nearly two years later, in June 2016, Signature refused to honor plaintiffs’ conversion request. By then, Signature was no longer Writ’s transfer agent, but apparently plaintiffs failed to make a conversion request to Writ’s new transfer agent, PST. Plaintiffs brought this suit in the Commercial Division against Writ, Signature, and PST for breach of contract, conversion, violation of the UCC, and negligence.

PST filed a motion to dismiss, which was the subject of the decision in question. In its motion to dismiss, PST argued that the Court should dismiss the claims against it for two main reasons: 1); The Court’s lack of jurisdiction over PST, a Nevada corporation; and 2) plaintiffs’ failure to state a claim against PST.[1]

Dismissal for Lack of Jurisdiction

Considering PST’s motion to dismiss for lack of jurisdiction, the Commercial Division concluded that it had neither general, specific, nor contractual jurisdiction over PST. Regarding general jurisdiction, the Court noted that in order to assert general jurisdiction over a non-domiciliary defendant, the plaintiff must establish that the defendant engaged in “continuous and systematic course of doing business” such that the corporation has a “substantial presence in the forum state.”[2] In the case of a corporation that is not headquartered in and operates outside of the forum state, the plaintiff must demonstrate “exceptional circumstances” to show there are sufficient contacts for the court to exercise jurisdiction.[3] In this case, PST was a Nevada corporation with no substantial presence in New York. Justice Sherwood ruled that having a website, hiring an agent in New York, and hosting conferences in New York failed to establish sufficient contacts for the Court to exercise its jurisdiction.

Similarly, the Court held that it lacked specific jurisdiction, which would have required a showing by plaintiff that PST “transacted business within the state, supplied goods or services in the state, [or] commit[ed] a tortious act in the state.”[4] Although plaintiffs pointed to cases where courts had exercised long-arm jurisdiction over transfer agents, the Court here was unpersuaded. Despite plaintiffs’ allegations that PST’s agent would perform “work related to the transfer of shares” in New York by, the Court found that “nothing is alleged to have actually happened in New York and the plaintiffs cite no support for their argument that jurisdiction may be based on an event…that would have happened in New York, had Pacific acted as plaintiffs wanted.”[5]

Finally, turning to contractually agreed upon jurisdiction, the Court noted that New York courts have found that non-signatories to agreements may be bound to the forum selection clause of those agreements if they are “closely related” to the signatory party “as well as to the dispute itself such that it was reasonably foreseeable that it would be bound by the forum selection clause.”[6] Here, the Court concluded that PST was not closely related to Writ. Additionally, despite the fact that PST had replaced Signature as Writ’s transfer agent, since it was “not involved when the transaction was consummated…it was not reasonably foreseeable that Pacific would be bound by the forum selection clause in the notes.” Further, the Court ruled that the fact that PST had received the notes did not make it subject to the forum selection clause contained in the notes.

Dismissal for Failure to State a Claim

The Court further ruled that plaintiffs had failed to state a claim against PST. Specifically, plaintiffs claimed that PST’s failure to issue shares to them violated UCC §8-407. However, the Court rejected that claim reasoning that the UCC created an obligation for transfer agents to transfer shares to existing shareholders not to issue shares to new shareholders. The issue at bar appeared to be whether there is a duty to create new shares. In addition, plaintiffs had not asked PST to transfer the shares; it had only requested a transfer from Signature. Thus, the Court found there was no claim against PST under the UCC. Finally, as to the negligence and conversion claims, the Commercial Division ruled that plaintiffs had failed to state viable claims given the absence of facts indicating that PST had an obligation to plaintiffs to issue new securities.

Conclusion

Plaintiffs could not establish that the Court had jurisdiction or that there were viable claims because they had failed to assert that PST had assumed the responsibilities of Signature pursuant to the agreement. Had plaintiffs made such a showing, they might have stood a better chance of asserting that PST was bound by the forum selection clause and had breached its obligation to plaintiffs.